Governance in the Eurozone and the Management of the Crisis

Maria MarkantonatouUniversity of the AegeanDepartment of Sociology

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Karl Polanyi’s The Great Transformation (1944) Gold Standard of the 19th century: Functional for international

trade and exports, but…

…required “hard currency” policies deflationary policies

If a country had external deficit need to prevent gold outflow reduction of wages and prices recession, unemployment social conflicts

The above bear some resemblances with the Eurozone…

But, interventions by national central banks characterized the 19th century Gold Standard, contrary to EZ and ECB“The euro itself was to become the quintessential gold that would be removing money altogether from the control of the nation state. In fact, the euro was, in some ways, much less flexible than the gold standard”(Seccareccia/Correa 2013).

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Background: the 1970s Crisis

Falling profits: Global North’s industrial output: -10%.

Also: high inflation in the US and Europe

Increasing capital mobility for better investment opportunities

Unemployment tax revenue shortfall less funding for welfare state

Remedy : the deflationary policy known as Volcker shock

(after Paul Volcker, chairman of the Federal Reserve, 1979-1989)

Rise in interest rates: from 11.9% (1979) to 20% (June 1981) Median family income: -10% and Unemployment: +11%

Similar policies followed in Europe. In Germany monetarist policies are promoted by the Bundesbank.

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The European Monetary System (EMS)

Main trends since the mid-1970s:

- Market liberalization/ monetarist policies

-Market internationalization/ capital volatility

Aspiration for common monetary regime in Europe.

1979: European Monetary System (EMS)

National currencies pegged to the ECU currency basket

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Exchange rate fluctuations after Bretton Woods

Competitive devaluations (e.g. of Italian lira to the detriment of German exports)

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From EMS to EMU

Difficulties related to the functioning of EMS:

- Member states could not adjust easily to Bundesbank’ s patterns/not all governments agreed politically with the German model

- Differences between German unions and those in other states

1989: Recommendation for Single Currency (Delors Committee)

1992, Maastricht Treaty:

Inflation and interest rates close to three lowest in Europe,

deficit <3%, debt <60% and exchange rates conforming to EMS

1990s: Convergence Period

2000s: Euro as a Single Currency

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The European Monetary Union (EMU) Reducing costs of exchange

In 1990, estimated to 0.4% GDP of future EMU member states

Reducing exchange rate insecurity New exchange rates alter prices agreed upon earlier, so either importers or exporters may loose money

Preventing competitive devaluations If many countries devaluate to boost their exports, devaluation spiral and inflation may emerge.

Preventing speculative attacksIf many speculators believe that a currency will devaluate and sell their holdings, they will undermine confidence in it.

BUT: Since states give up their monetary policy tools, what happens in case of a recession given ECB’s role?

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After 10 years of Euro… Asymmetries in the EZ

• EZ benefits countries with an export orientation that manage to keep wages low

• Germany: tight wage moderation policy. Nominal wage increases tended to decline from 1999 to 2005 higher competitiveness

• Greece, Portugal, Spain, and partially Italy have lost a significant amount of wage and price competitiveness Deterioration of trade balances in the EZ

• After the crisis: new division in the EZ: Center-Periphery ?

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German wage policies

10P. De Grauwe “The Fragility of the Eurozone’s Institutions”, Open Econ Rev, December 2009

Current Account Imbalances GR/DE

11Source: Eurostat

Towards the 2008 Crisis • Monetarist policies tamed inflation in the 1970s/

unemployment/recession tax revenues were decreasing increase in public debt in the 1980s

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The 2008 Crisis in the US• Monetarist policies tamed inflation in the 1970s

unemployment/recession tax revenues were decreasing increase in public debt in the 1980s markets started to push states, in order to get their money back states cut public expenditure, privatizations etc. Financialization as a tool for growth increase in private indebtedness in the 1990s and 2000s.

• New “options” for the poor through real estate loans and self-funded pension schemes.

• This model crashes in 2008 Global Crisis“the Great Bail Out” (about 20 trillion $ for banks worldwide)

• the crisis spreads in Europe… 13

Public Support to the Financial Sector (as of February 2009, % of GDP)

14Source: International Monetary Fund (2009).

Eurozone Responses to the Crisis

• European Financial Stability Facility (EFSF, 2010): temporary “rescue” mechanism to member states in crisis. It issues bonds and lends countries under a program.

• European Stability Mechanism (ESM, 2012)-ratified by Treaty: permanent agency for lending countries in difficulties under EU supervision on the term of fiscal adjustment. Also private agents participate no debt mutualization

• Fiscal Compact (2012): Requires Balanced national budgets (deficits < 0.5%, debt <60%) to be incorporated at a national constitutional level. In case of deficit states have to submit an adjustment plan. Automatic corrections. A state can ask for the financial sanction of another state.

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Six Pack, Two Pack

• Six Pack (2011): Countries have to balance their budget within a “Medium Term Objective” (MTO)= plan of 3 years,

- Excessive Deficit Procedure: If a country does not reduce its “structural deficit” within the MTO plan sanctions. Can be also triggered if the debt is >60% and not decreasing fast enough

- “Reverse Qualified Majority” or “automaticity”: Commission can impose sanctions, except if 2/3 vote against it (a way to bypass national vetos, which formerly functioned with about ¼ of the vote).

- Two Pack: Countries submit draft budgets by Mid-October every year, EC evaluates it and may revise it.

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Critical Remarks to Fiscal Compact,the ESM and “Stability Bonds”

• A Self-inflicted Crisis: ESM requires funding from member states new increases in public debt new austerity?

• Constitutionalization of Fiscal Discipline: States have to pass budgetary restrictions in their Constitutions a tendency for parliamentary rights to decide budget ti become conditional?

• Even the “Stability Bonds” (EC proposal, 2011) require “political stability and predictability” homogeneity in economic policy regardless from electoral results?

• Deepening democratic deficit through the “reverse majority”?

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Countries in Crisis: Greece, Ireland, Portugal, Spain

Greece: Background: Public debt/deficit, current account deficit

A period of high growth comes to an abrupt end (1995-2008).Developments: Bailout, strict austerity, vicious circle of recession

2010-2013: Series of IMF/EU “rescue” loans` on the condition of heavy wage cuts, taxation, labour deregulation. Constant recession and unemployment

Ireland: Background: Low public debt/ bubbles in banking sector

2008: Six banks involved in 100 billion property bubble government undertakes the burden rising debt and deficit, despite austerity.2008-2009: Credit and construction sector disaffected unemployment Fall in tax revenues

Developments: 2010: Troika package Public sector downsizing (health, education, security), wage/benefits cuts, increased taxes.

2012: Fiscal Compact incorporated in Constitution, following a referendum.

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Greece, Ireland, Portugal, Spain

Portugal: Background: low public debt, chronic current account deficit, low growth before the crisisDevelopments: Troika package and bank recapitalization (2011) Increases in taxes, freeze of public sector hiring, downsizing, public sector wage and pension cuts Unemployment rose from 12% to 16% in 2011-2012.

Spain: Background: low public debt, real estate bubble

Construction sector hit by the 2008 crisis unemployment from 8% to 20% in two years. Recession, bank bailouts public indebtedness

Developments: Banks recapitalized by the EFSF2012: gave about 137 billion to the banks (100 EFSF, 37 own resources)Austerity plan, tax increases, wage/benefit cuts to reduce public deficit. Unemployment up to 27%. 2011: Constitution amendment along the lines of the Fiscal Compact

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20Source: Eurostat

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Europe as a Competition Agent

After the 1970s crisis: Emergence of the “Competition State” (Joachim Hirsch): promotes all needed regulations to increase national competitiveness in its own territory

Similarly for Europe: EEC/customs union Free trade zone Free capital movement/common market/EMU

International forces undertake the post-war reconstruction of Europe and its integration in Atlantic Fordism through a Keynesian orientation. This is replaced by a Schumpeterian orientation at the EU-level (competitiveness, entrepreneurship, labor deregulation (Jessop 2002), as can be seen from the Maastricht Treaty to the Fiscal Compact

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Europe and “the Markets”: Some Open Questions

• Fiscal Europe or Social Europe?

“The financial crisis has reinforced national egoisms even further but, strangely enough, it has not shaken the underlying neoliberal convictions of the key players. Today, for the first time, the European project has reached an impasse” (Habermas, 2011)

• Have bond markets become the “masters of national governments” (Palley 2011)?

• Conflict of two different versions of the European project?: on the one hand, European integration as a democratic process and on the other, as a market-friendly neoliberal one.

• The Future of EZ: Towards integration or breaking up?

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Thank you!!

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